Bond Prices Fall on Fears of ECB Rate Hike

U.S. Treasury debt prices added slightly to losses Monday after a stronger-than-expected reading on Midwest factory activity soothed worries of further contraction in manufacturing.

Benchmark 10-year notes were down as much as 9/32 in price at 98-30/32 after the factory data from the National Association of Purchasing Management-Chicago.

The 10-year note yield, which moves inversely with its price, was briefly at 4.00 percent, compared with 3.99 percent shortly before the regional manufacturing data. The 10-year note yield finished at 3.97 percent late Friday.

Government debt prices slipped earlier with Bunds after euro-zone inflation hit a record high in June, solidifying expectations the European Central Bank will raise interest rates this week.

Inflation worries were also exacerbated by the continued surge in crude oil prices, which climbed to all-time peak of $143.67 a barrel.

Euro-zone inflation posted a record year-over-year increase of 4 percent in June compared with May's 3.7 percent.

"Here in the U.S., the tension over the future course of monetary policy is nearly as acute as that in Europe," said William O'Donnell, director of interest rate strategy with UBS Securities in Stamford, Conn.

Two-year Treasury notes were 4/32 lower in price for a yield of 2.70 percent, up from 2.63 percent late Friday.

The fall in government debt prices was partly offset by safety bids on an expected lower opening in the stock market.

Sky-high oil and fears of worsening problems in the financial sector threatened again to push the Dow Jones Industrial average into bear market territory.

Worrisome overseas inflation data kicked off a negative start to a holiday-shortened week, but investors will be focused on this week's busy U.S. economic calendar, especially the government's monthly non-farm payroll data Thursday.

On Monday, traders are bracing for regional factory data from the National Association of Purchasing Management in New York and Chicago.

Weakness in these regional manufacturing data will likely further pare market expectations of the Federal Reserve raising interest rates at its August policy meeting, analysts said.

In other cash trading, five-year notes were down 6/32 in price for a 3.39 percent yield, up from 3.34 percent late Friday, and the 30-year bond was down 2/32 for a yield of 4.52 percent, flat from late Friday.